When is the right time to execute energy transition — from roads to rail, and from fossil fuels to renewables?

If you’re a believer in the free market, you might say the right time for energy transition is when renewables are cheaper than fossil fuels. Why pay $0.15 to $0.30/kWh for a rooftop solar photovoltaic (PV) system before incentives today, when you can buy grid power for $0.08 to $0.15/kWh, depending on where you live? Why invest $600 billion in high speed rail, when we can just buy a few more cars and lay a bit more asphalt?

Because if you waited for that, you’d quickly find yourself out of gas, as I explained last week. The best available data suggests that the decline of conventional oil will finally overwhelm new drilling starting some time between now and 2014. The later estimate attempts to account for the ongoing recession in the OECD. Many analyses of oil data have projected 2012 as the beginning of decline, such as a 2010 U.S. Joint Forces Command report, which said, "By 2012, surplus oil production capacity could entirely disappear, and as early as 2015, the shortfall in output could reach nearly 10 million barrels per day."

Let’s do a bit of simple arithmetic and see what it would take to make up for that decline on an energy basis. Most studies show that the world’s oil production is currently declining at an average rate of 5 percent each year. Against 74 million barrels per day (mbpd) of conventional oil* production today, that’s an annual supply loss of 3.7 mbpd, or 1,350,500,000 barrels per year. Put another way, we’d have to replace 3.7 mbpd of capacity each year just to stay flat.

For 2010, the world’s production of renewable energy** was 158,600,000 metric tonnes of oil equivalent. At 6.841 barrels in a tonne, that’s 1,084,982,600 barrels of oil equivalent from renewables, or about 80 percent of what we are already losing in oil production (data from BP, 2011).

This simple energy value calculation leaves aside the infrastructural challenges of transitioning from liquid fuels to electricity, and a host of other issues. And it remains to be seen how much additional supply will balance out depletion in the coming years. But as a rule of thumb, it’s helpful to realize that even doubling the world’s entire renewable energy capacity wouldn’t make up for the annual decline of oil…let alone the decline of coal and gas, starting around 2025.

Worse than the decline of oil production is the decline of net oil exports. Net oil exporters, awash in the cash from their oil sales, are growing up and industrializing, which causes them to consume more of their own production and cuts into their exports. At the same time, rapidly growing economies like China and India are consuming an ever-larger share of the available net exports. As analysts Jeffrey Brown and Samuel Foucher have shown, available net exports have fallen at an average rate of about 1 mbpd per year from 2005 to 2010, from about 40 mbpd in 2005 to about 35 mbpd in 2010 (BP and EIA data, total petroleum liquids). On current trends, China and India would consume all of the available exports in about 20 years, while the U.S. is slowly squeezed out of the global market.

The challenges of energy transition

It should be clear that the vogue dismissal of peak oil fears based on optimism around marginal, incredibly environmentally destructive resources like tar sands and shale hardly stands to account. Canadian tar sands production today is about 1.5 mbpd, and it is hoped to increase to 3 mbpd by 2020. “Tight oil” production from shales is hoped to grow from 0.9 mbpd today to 2.9 mbpd by 2020. Even if these projections panned out—and am I extremely skeptical that they will, based on the failure of such projections over the past decade, the cost of new production, the outlook for project financing, among other factors—that’s only a total increase of 3.5 mpbd over a decade . . . less than one year’s decline in conventional oil.

We know from the history of energy transitions that it generally takes on the order of 100 years for a new energy source to go from 1 percent to 50 percent of supply. Vaclav Smil’s recent book Energy Transitions offers an excellent detailed history on this subject. For example, it took 53 years for oil to go from 1.9 percent of total primary energy supply in the U.S. in 1880 (when wood was still our leading fuel) to over 25 percent in 1933. The comparison is apt, because renewables currently account for just 1.3 percent of the world’s primary energy supply. But the sheer volume of energy we consume today is many times greater, so it’s likely that transitioning from fossil fuels to renewables now will take substantially longer.

Switching contexts slightly from liquid fuels to grid power generation, how long will it take until renewables are cheaper than fossil fuels? According to some good recent calculations by physicist and energy consultant Kees van der Leun, solar PV is already competitive with regular grid power in sunny regions like the Southwest, at $0.12/kWh. He projects that by 2018, solar PV will be the cheapest way to generate power in Latin America, Africa, the Middle East, Australia, and much of Asia, including India.

But if we wait until 2018 to switch to renewables, and the U.S. Joint Forces Command is right, the world will be struggling to make do with at least 14 percent less oil than it has today. It is difficult to overstate the significance of this in a world where production merely staying flat year-to-year has the known potential to cause prices to double or triple, and cause severe economic destruction. The only experience we’ve ever had even close to that was the Arab Oil Embargo of 1973-74, when about 7 percent of production was lost, and oil prices quadrupled to a shocking $12 a barrel, or about $55.23 in today’s dollars (where the average real price in 2011 has been $95). I remember those days, sitting in line in 110 degrees in Tucson for several hours just to buy a few gallons on our designated day of the week. I shudder to think what the equivalent experience would be today.

Should we wait for transition until the net energy (energy returned on energy invested) of oil, which was 100 in 1860 and is now about 11, falls to the point where it’s not worth doing anymore, which is around 3? Probably not. Because once it falls to about 5, you’re already in trouble, and unable to maintain a complex society.

Should we wait until our transportation infrastructure becomes rusted and too expensive to maintain, like the photo above? No, because declining net energy, declining net exports, and declining production will make it increasingly difficult and expensive to do anything. You have to build the replacement infrastructure while the energy and materials and capital you need to do it are reasonably available.

Clearly, it makes no sense to wait until renewables are cheaper than fossil fuels before beginning transition, particularly if you’re talking about transportation fuels. To do so would be to gamble with the entire economy and risk severely negative outcomes, like fuel shortages, riots, and depression. Are we really willing to take such risks, simply because we prefer to believe that the free market will magically sort everything out, particularly when we know that our economic theory evolved in an age of energy surplus which is now behind us?

It’s hard for anyone alive today to appreciate how immense that surplus is. Over the 150-year-long history of industrialization, we have built a complex civilization that has literally remade the face of the planet. To do so, we have burned the condensed energy of hundreds of millions of years of ancient sunlight: over one trillion barrels of oil, over half a trillion tons of coal, and over 80 trillion cubic meters of natural gas. All of it was essentially free for the taking, plus production costs. We will never have such a bonanza again.

This has engendered a recency bias that’s hard to discount. We assume that the next 50 years will be like the last 50 in terms of energy availability, when the data clearly show that it will not. We assume that if oil runs short, we’ll find a substitute, not comprehending that the substitutes have much poorer quality, far lower production rates, and lower energy content. We assume that societal surpluses, like health care, or one person per car, or a complex society sporting ten times the retail space per capita of Europe, are normal. They are not. They are artifacts of an age when energy was insanely cheap.

The right time to execute transition is not when the alternatives are cheaper. The right time is before it’s too late, and while it’s still affordable. That time was really 40 years ago. We have less than two years left before things really start getting difficult. What, exactly, are we still waiting for?

* I use EIA data for global conventional oil production, because they restrict their definition of “oil” to crude plus lease condensate (natural gas liquids that are produced and naturally associated with the crude). EIA shows 74 mbpd for 2010. BP includes shale oil, oil from tar sands and a liberal definition of natural gas liquids (NGLs) in its definition, which is a bit of a distortion. Unconventional “oil” from tar sands and shale is not equivalent to conventional crude, in that both sources are much more expensive, with much lower flow rates and net energy. BP shows 82 mbpd for the world in 2010.

** BP defines renewable generation as “gross generation from renewable sources including wind, geothermal, solar, biomass and waste, and not accounting for cross-border electricity supply. Converted on the basis of thermal equivalence assuming 38% conversion efficiency in a modern thermal power station.”

Chris Nelder is an energy analyst and consultant who has written about energy and investing for more than a decade. He is the author of two books on energy and investing, Profit from the Peak and Investing in Renewable Energy, and has appeared on BBC TV, Fox Business, CNN national radio, Australian Broadcasting Corp., CBS radio and France...
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